Luxury Car Tax on Dealer Demo Vehicles: What You Need to Know

Luxury car tax (LCT) is a tax applied to certain vehicles, including luxury cars, sold in Australia. It aims to make luxury cars less accessible by increasing their cost. However, when it comes to dealer demo vehicles, the application of LCT can be somewhat confusing. This article will explain what a dealer demo vehicle is, how LCT applies to such vehicles, and the circumstances under which you may or may not need to pay LCT on a dealer demo car.

What is a Dealer Demo Vehicle?

A dealer demo vehicle is a car used by a dealership primarily for demonstration purposes, test drives, and display. These vehicles are typically driven by potential customers during test drives or used by dealership staff. Despite being new, dealer demo cars have already been driven, albeit for a limited number of miles. These vehicles are often sold at a discount compared to brand-new cars because they are considered used to some extent.

Understanding Luxury Car Tax (LCT)

LCT is a tax imposed by the Australian Government on cars with a GST-inclusive value above a certain threshold. As of 2024, the LCT threshold is set at AUD 71,849 for fuel-efficient vehicles and AUD 84,916 for other vehicles. LCT is charged at a rate of 33% on the value of the car that exceeds these thresholds. The aim is to tax the luxury segment of the automotive market more heavily, thus discouraging excessive expenditure on luxury vehicles.

How LCT Applies to Dealer Demo Vehicles

When it comes to dealer demo vehicles, the application of LCT depends on a few key factors:

1. Original Purchase Price and LCT Threshold: The LCT is calculated based on the original purchase price of the vehicle when it was first sold to the dealership. If the demo vehicle’s original purchase price exceeded the LCT threshold, then LCT would have been applied at that time. When the demo vehicle is sold to a new owner, the LCT liability does not reset, and the amount of LCT initially paid remains.

2. Depreciation and LCT Calculation: While dealer demo vehicles are sold at a discount, LCT is not recalculated based on the discounted sale price. Instead, the LCT is applied based on the vehicle’s original GST-inclusive value. Thus, even if the demo car’s resale price falls below the LCT threshold due to depreciation or heavy discounting, LCT may still be applicable if the original price exceeded the threshold.

3. Dealer Demonstrator Sales: When a dealership sells a demo vehicle, it may have to account for LCT depending on whether the vehicle has been used in a way that affects its new car status. If the car is still considered new, the dealer must charge LCT as they would on any new vehicle. However, if the car is deemed second-hand or the dealer has already accounted for LCT in a previous transaction, LCT might not apply.

4. Exemptions and Special Cases: Certain exemptions may apply to LCT, such as for primary producers or tourists purchasing under the Tourist Refund Scheme. For dealer demo vehicles, if they are sold to eligible entities or individuals who can claim an exemption, LCT may not be applicable.

Example Calculation

To understand how LCT applies, consider this example:

• Original Purchase Price of Demo Vehicle: AUD 90,000
• LCT Threshold (non-fuel efficient): AUD 84,916
• LCT Value Above Threshold: AUD 90,000 - AUD 84,916 = AUD 5,084
• LCT Payable: 33% of AUD 5,084 = AUD 1,677.72

In this example, the dealer demo vehicle’s original purchase price was AUD 90,000, exceeding the LCT threshold for non-fuel-efficient vehicles. Therefore, LCT was applied to the amount exceeding the threshold, resulting in an LCT liability of AUD 1,677.72. This amount would be included in the price when the vehicle is sold to a customer.

Buying a Dealer Demo Vehicle: What Buyers Need to Know

1. LCT Already Paid: In most cases, LCT will have already been paid by the dealership when they initially purchased the vehicle. Buyers should check the vehicle's compliance plate and ask the dealer for a detailed tax invoice showing the breakdown of costs, including any LCT paid.

2. Negotiating Price: Since dealer demo vehicles often have LCT included in their pricing, buyers may have limited room to negotiate the LCT component. However, understanding the LCT calculation and the car’s original price can help in negotiations.

3. Warranty and Condition: Buyers should consider that demo vehicles might have been used for test drives or other purposes, potentially affecting their condition. However, these cars usually come with full manufacturer warranties, making them an attractive option compared to new cars, with some added savings.

4. Tax Benefits and Deductions: Business buyers and those using the vehicle for eligible purposes may be able to claim deductions related to LCT. It’s advisable to consult a tax professional to understand any potential tax benefits.

Conclusion

Dealer demo vehicles present a unique scenario when it comes to luxury car tax. Understanding how LCT applies to these vehicles can help buyers make informed decisions, ensuring they are aware of all costs involved. It’s crucial to remember that LCT is based on the original purchase price of the vehicle and not necessarily the discounted price at which a demo car is sold. By being informed, buyers can better negotiate prices and understand their tax obligations.